May 07, 2020How to Avert a Deeper Crisis: Concrete Steps for an Urgent Social Response

Interview with Sarah Hague and Walid Sayegh

I. What should the government do to mitigate the welfare losses caused by the lockdown?

Given the deepening effect of the economic crisis on people’s lives due to COVID-19, an economic and social protection response is vital and should be prioritized as soon as possible.

UN agencies working under the Joint Social Protection Fund (which includes UNICEF, the International Labor Organization, World Food Program (WFP), UNDP, and UN Women) have outlined four core priority actions that should be rapidly taken by the Lebanese government to mitigate the welfare losses caused by COVID-19 and the existing economic crisis:

First, increasing financial access to healthcare and support for households with COVID-19 cases will be crucial, and would be achieved through several measures:

Distribute infection prevention kits and information and guidance to households with mild COVID-19 cases and ensure referral to integrated package of support services through municipalities, civil society, and Social Development Centers (SDCs).

Remove all co-payments for COVID-19-related testing and hospitalization costs for those without health insurance, regardless of nationality. A clear protocol for equal access for all individuals to treatment in public hospitals irrespective of insurance status should be established.

Suspend all payments and fees for primary health consultations for all children, pregnant women, patients over 70, and those with disabilities in publicly run Primary Healthcare Centers and SDCs. The non-state sector should be encouraged to follow suit.

Address and ensure immediate financial sustainability of the National Social Security Fund’s (NSSF) health and maternity insurance schemes, in addition to putting in place solutions to clear NSSF arrears with hospitals. Also, there should be quicker reimbursement on health claims at NSSF.

Secondly, there is a very urgent need to immediately expand direct income support for those worst impacted by the crisis, particularly the poor and vulnerable, through:

Immediately delivering social assistance through cash transfers to the poor and vulnerable population. This could include expanding the National Poverty Targeting Program (NPTP) to reach more people under an eventual World Bank program with UN support, and ensuring that in the immediate term, cash support is provided to vulnerable groups (e.g. those over 70, persons with disabilities, young children, and pregnant women), potentially prioritizing those in quarantine.

Introducing a wage subsidy scheme for workers registered in the NSSF, to support wage costs of affected small and medium enterprises to prevent layoffs.

Introducing an emergency income support scheme to temporarily support incomes of vulnerable workers (i.e. self-employed and informal workers) who have lost their jobs. We could look at innovative alternatives as well, such as an emergency cash-for-work scheme to support those made unemployed and caring for others at home.

Third, there is a need to introduce measures to reduce other household costs, including:

Suspending payments of income taxes in the bottom 4 tax bands (less than LBP 60 million a year) until the end of 2020.

Suspending debt repayment installments to all commercial banks against all loans fewer than $100,000 until the end of 2020.

Suspending electricity bills for those in a very low consumption bracket for six months.

And last, maintaining economic activity through supporting businesses such as:

Suspending payments of national and local taxes, fees, and levies for micro, small, and medium businesses and workers affected by the lockdown, especially in the informal sector.

Suspending debt repayment installments to all commercial banks against business loans of under $300,000 until the end of the year for affected enterprises.

Allowing a delayed payment of social security contributions (at least for End of Service Indemnity component) for affected businesses, with no associated penalties.

All these measures are important and need to be seen as a holistic approach: Picking just one or two measures to implement will not be sufficient and will make Lebanon’s eventual economic recovery all the harder.

In the slightly longer term, the work that UN agencies started alongside organizations such as Beyond Reform and Development to support the government to develop a National Social Protection Policy should not be dropped. Lebanon needs, now more than ever, a coherent and comprehensive direction for social protection reform and coverage.

II. How should the government's interventions be funded given significant cuts in social spending in the 2020 budget and the dire fiscal and financial situation?

The fact that the COVID-19 lockdown has come amid an already difficult economic and financial crisis certainly complicates the country’s ability to finance an adequate response. However, it is worth considering at such exceptional times that a well-managed recovery plan will be significantly more valuable for socioeconomic stability, even at the cost of short-term fiscal consolidation.

Several mechanisms that were previously considered for cutting the budget deficit can be repurposed to finance needed social support programs. The most evident, and one with the least distortionary impact, is a progressive wealth tax. A progressive tax on deposits made in the local currency, for example, may in fact positively impact economic output by shifting money from ‘idle’ accounts to support the real sector and mitigating losses in the demand of low-income households for basic goods and services. However, given the administrative and political complexities that come with passing and implementing a new tax law, in addition to the urgency of needed funds, other financing structures could also be considered in the short-term.

Money supply in Lebanese liras can be expanded in the form of zero-interest debt to the state, or even offered by the central bank as ‘helicopter money’ and delivered by the government. Such an expansion in money supply could have little if any impact on price inflation, given severe cuts in aggregate demand (total demand of goods and services in the economy) now occurring. However, proper targeting will be crucial to limit potential fallout from this measure. Lebanon cannot afford a scenario where this created money finds its way into the parallel market for US dollars, rather than to people who need it the most to spend on basic goods and services that they can no longer afford. Knowing the country’s high reliance on imports, some indirect leakage of funds outside the economy could be inevitable, adding pressure on the exchange rate. However, well targeted social assistance programs will again have a smaller impact on the local currency’s devaluation than the indiscriminate exchange-rate policies that are currently in place, and which do not differentiate between small and large depositors, in addition to excluding 53% of the population who do not have bank accounts. Moreover, demand from low-income households will be unlikely to exceed previously budgeted funds for strategic imports, especially given that the drop in oil prices and the demand for fuel will substantially ease the financing of the deficit in US dollars for the government and external sector financing needs for the central bank. In the longer term, this funding can be potentially complemented by sources of international long-term and low interest financing including from the diaspora.

Whatever the financing mechanism adopted, it is worth remembering that the impact of failing to act could be significantly more serious than that of expanding the deficit to support the most vulnerable households and the wider economy.